As the Memorial Day holiday approaches, with its promise of barbecues, the beach and summer ahead, many Americans are feeling a simultaneous sense of dread.
Could the United States government actually default on its debt next week? Will lawmakers come up with a last-minute deal, as they have so many times in the past, or is it different this time?
The media isn’t offering calm. CNN warns of a 40% drop in the stock market, advising Americans to adjust their 401(k) portfolios and prepare for delays in Social Security payments. CNBC cautions investors to “brace yourself” for the coming week.
No one really knows what would happen if the world’s largest economy, the issuer of the global reserve currency, defaulted. Treasury Bills are considered safer than gold, at least for now. The world financial system is built around the safety of U.S. government debt.
Would the Treasury Department find a way pay bondholders first to preserve the currency? If so, who wouldn’t get paid? Government employees? Doctors treating patients under Medicare? Local governments expecting grants?
How far would the stock market fall, and how quickly would companies begin to lay off workers? How long would the economic turmoil last?
The political standoff in Congress is about the growing federal deficit and the optics of borrowing more. We already owe this money; not raising the debt limit doesn’t change anything. But in an era of short sound bites, it’s easier to talk about the debt limit than the underlying structural problem.
Simply put, there are only two ways to balance the federal budget and bring down the deficit: raise more money with taxes, or spend a lot less. Over decades federal tax rates have steadily fallen in the United States, while spending has increased, with Medicare and Social Security in our aging society driving the growth. But raising taxes or reforming Medicare or Social Security are politically impossible, leaving very little room to balance the budget.
Despite this larger reality, a minority on the hard right, mostly representing rural districts, is driving the Republican Party to demand lower spending immediately. If not, this minority won’t let the Treasury borrow more, pushing the the country into default.
If this feels like a hostage situation, it is. Our jobs, savings and futures depend on whether a minority of Republican members of Congress believe sufficient concessions have been made to give their vote. They’ve pulled the pin on the hand grenade, so to speak, but are still holding the lever down.
A long-term solution to the deficit has to include some increase in taxes coupled with reforms to Medicare and Social Security as well as reconsideration of other government programs. But that will take time and vision. It’s not a hostage negotiation.
A sunny Memorial Day weekend may banish these worries for awhile, but the June 1 “x-date” cited by the Treasury is fast approaching. There’s little we can do but hope for the best.
Chris Jennewein is editor and publisher of Times of San Diego.